What are network effects?

Youre not just buying a product, youre buying the crowd that makes the product better.

What are network effects?

When each new user makes the product more valuable for all other users.

Think of it like a snowball: every flake makes the ball bigger, which picks up even more snow on the next roll.

Core idea in plain English:

1. Direct network effects: Same-side use boosts value. Picture a phone tree. If your friends join, your phone is worth more because you can reach more people instantly.
2. Indirect (two?sided) network effects: One side pulls the other. Like a busy food courtmore diners attract more vendors, which attracts more diners.
3. The flywheel: More users higher value better retention more word?of?mouth more users. Its a loop, not a line.

Real company snapshots:

Apple iOS (direct + indirect): More iPhone users attract more app developers. More quality apps make iPhones stickier. iMessage and FaceTime add pure same?side pullfriends join because friends are already there.

Visa/Mastercard (indirect): More cardholders push more merchants to accept cards. More acceptance makes cards more useful to cardholders. Scale improves fraud models and approval rates, which makes checkout faster and safer for everyone.

Investor lens you can use this week:

Look for rising engagement as the network grows (DAU/MAU, cohort retention).
Check balance, both sides healthy (users and developers; cardholders and merchants).
Watch durability, switching costs, identity/data lock?in, and declining unit costs with volume.

Takeaway: Simple, right? Great networks dont just get biggerthey get better because theyre bigger.